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5 Things To Ponder: Sex, Money And The Carry Trade

In last week’s newsletter, I discussed the return of “Bad News Is Good News” as the driver of the markets. This week saw the continuation of that theme as one economic report after another came in far below expectations. The question remains, and something I discussed this week on The Willis Report, is whether it is actually all just a function of the weather? Of course, there is something inherently wrong with driving asset prices higher based on hopes that a weaker economy will keep the Fed’s “liquidity fix” flowing to drug addicted Wall Street traders. Under that theory, we should be rooting for an outright“depression” to double our portfolio values. But, when put into that context, it suddenly doesn’t make much sense. Yet that is the world in which we live in…for now.

Therefore, as we wind down the week on this “options expiry” Friday, here is a list of things to think about over the weekend.

This first bit is really just something I found interesting. The essential mission of the Austin Institute is the dissemination of both thought-provoking and rigorous academic research on family, sexuality, social structures and human relationships. The “economics of sex” is interesting from the standpoint that the value of “sex” has fallen precipitously over the last few decades due to scientific advances and the decline of the “moral” fabric in society. What would it take to cause that “price” to once again rise?

“Keynes will be remembered as “a man with a great many ideas that knew very little economics,” Friedrich Hayek notes in this brief interview and when challenged on his ‘parochial’ knowledge of economic history he was “not sheepish in the least… he was much too self-assured.” Hayek’s perspective casts Keynes in a very different light than his fan’s apostolic adoration might suggest, “he was utterly contemptuous of anything that had been done before.” While Hayek describes Keynes as one of the most intelligent people he had known, he perhaps sums up the man’s work in this brief phrase – “economics was just a side-line for him.” As we note below, many describe Keynesian policy as ‘dumb’, however a more appropriate word would be ‘foolish’.”

In the late 1980s, Dent forecast that the Japanese economy, then the darling of the world, would soon enter a slowdown that would last more than a decade. In the early 1990s, he predicted that the DOW would reach 10,000. Both of these predictions were met with much skepticism, and yet both eventually came to pass. In late 2006, he estimated the Dow would reach 16,000 – 18,000 and the NASDAQ 3,000 – 4,000.

In his 2011 book, he suggests that consumer spending will begin to plummet in 2012 with the Dow bottoming out somewhere between 3,000 and 5,600 in 2014. After hitting bottom, stocks will experience a mini-rally in 2015-2017 before falling into a final bottom during the 2019-2023 period, when the 45-50 age group troughs because the U.S. birth rate reached its own low in 1973.

Robert Seawright takes Dent to task with a recent missive.

“Now marketing himself as a “rogue economist,” Harry Dent is forecasting “gold down to $750 an ounce, housing down 35%, oil down to $10 a barrel, the Dow down to 6,000, [and] a war between inflation and deflation” this year. Theheadline is indeed shocking:

If Only HALF of Harry’s Forecasts Come to Pass, the American Life We Know Will Disappear for Good!”

However, as a long term investor, I think we need to set aside “predictions” for a moment. The question we should be thinking about is whether Dent’s work on demographics has merit…or not?

There is much debate over the Fed’s ongoing “quantitative easing” programs and whether or not there is an actual effect on asset prices. Joseph did a good job at explaining how the Fed’s programs creates the “carry trade” that lifts asset prices. This also explains why the markets are so fixated on the Fed’s “tapering” commentary.

“The reason it matters to investors is that stock and bond prices have benefited greatly from QE and deficit spending. Not only has QE expanded M2, but a large portion of that M2 has found its way directly into stocks, pushing equity valuations higher and higher. The reason QE hasn’t produced significant economic growth is in part the fact that the money created on the front-end of this process has been invested in risk assets rather than flowing into the economy to stimulate GDP growth.

I have discussed previously that the U.S. is likely now caught in a “liquidity trap.” Cullen’s comments regarding “QE-4EVA” is suggestive of that view being correct.

“Why do I think this? Well, first of all, the Fed’s balance sheet is going to remain large for a long time because the Fed isn’t going to shrink its balance sheet by selling assets. So the effects of QE are here to stay. But more importantly, I think the economy is operating at a muddle through pace for reasons I’ve discussed previously and that means that the Fed will maintain an accommodative interest rate structure for some time.

The interesting thing about this potential world is that it means QE is the new policy tool of choice. In other words, QE could potentially replace interest rate policy as the primary policy variable.

QE is probably here to stay in some form for the foreseeable future. In fact, it could become THE policy tool of choice in future business cycles…”

As always, I hope that you will have an enjoyable weekend. Please feel free to send your own thoughts and views by email or tweet me @lanceroberts.

About The Author

After having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; Lance has pretty much “been there and done that” at one point or another. His common sense approach has appealed to audiences for over a decade and continues to grow each and every week.

Lance is also the Chief Editor of the X-Report, a weekly subscriber based-newsletter that is distributed nationwide. The newsletter covers economic, political and market topics as they relate to the management portfolios. A daily financial blog, audio and video’s also keep members informed of the day’s events and how it impacts your money.

Lance’s investment strategies and knowledge have been featured on Fox 26, CNBC, Fox Business News and Fox News. He has been quoted by a litany of publications from the Wall Street Journal, Reuters, The Washington Post all the way to TheStreet.com as well as on several of the nation’s biggest financial blogs such as the Pragmatic Capitalist, Zero Hedge and Seeking Alpha.